It is an early autumn evening in Reykjavik. As the sun sets across the Atlantic ocean, staining the sky a deep scarlet, a single-decker bus winds through the centre of town. As it approaches, the first thing you notice is the bus's high-pitched purr.

It comes to a halt with surprising haste and a steady stream of steam rising from the roof is the only other sign that this is no ordinary bus. In fact, this Citaro city bus, emblazoned with the flag of the European Union and the three-pointed star of Mercedes-Benz, is powered not by diesel, but by hydrogen. Compared with the fume-belching diesel buses that loudly pollute our cities, Reykjavik's first hydrogen bus is as quiet as a golf cart and as smooth as an electric milk float. The bus is fuelled with liquid hydrogen that is stored on the roof beneath the bulk of a fibreglass cowling. There it is mixed with oxygen to produce the electricity that drives the vehicle. The only by-product from this process is water vapour, which escapes from the exhaust in the roof. The bus, developed in Germany by DaimlerChrysler, has a range of 125 miles and a top speed of 65mph.

This hydrogen bus is one of three to be delivered to Iceland earlier this month. Despite their relatively squeaky clean image, Icelanders are bad polluters and car ownership per capita is one of the highest in the world. The hydrogen bus, part of an ambitious scheme that experts claim could convert Iceland into a hydrogen-based economy by 2030, is part of a wider project called Clean Urban Transport for Europe (Cute), an EU-funded, £35m, two-year trial backed by BP and Shell.

In fact, 2003 has been something of a breakthrough year for hydrogen power. Back in May, Madrid became the first city in the world to run a regular hydrogen bus service, and hydrogen buses now also run in Hamburg, Barcelona and of course Iceland. By the new year, 10 European cities (plus Perth in Western Australia) will each have taken delivery of small fleets of hydrogen buses, and similar schemes will soon be under way in Japan, Singapore and California. Although exact details have not been released yet, London is due to take delivery of its first hydrogen buses by Christmas, with passenger services kicking off in the West End early next year. The trial - part of the Cute project - has the backing of Ken Livingstone and government ministers and is being coordinated by Transport for London. "The big benefit is that these buses will make a significant contribution to reducing pollution from emissions," says Mike Weston, who is the project manager for the London trial.

But the trial does not quite have the backing of everyone. Earlier this month BP was forced to suspend plans to open the UK's first hydrogen filling station after councillors in the east London borough of Havering rejected a planning application despite reassurances from the Health and Safety Executive, Environment Agency and the Fire Brigade.

"The use of hydrogen is so new that we simply don't know how safe it is," says Alby Tebbutt, a conservative councillor for Havering. "All we want is to be sure that we are not going to get something that is going to blow up overnight." But Tebbutt says his biggest fear is that if hydrogen proves successful, then leafy Hornchurch could be "inundated" with hydrogen vehicles heading for the only place in the UK where they can top up. The depot for the hydrogen buses is in Hackney, he says, several miles west of Hornchurch.

"So why on earth do they want to build a hydrogen station here?" Those involved in the project dismiss any safety fears. "Hydrogen has been used in the production of petroleum for decades, and BP has an excellent track record," says Stephen Cook, Shell's hydrogen business development manager. "We believe that the proposed hydrogen station is as safe as a conventional petrol station." Meanwhile, BP says that it already has contingency plans should its planning appeal fail, and that none of this will affect the start date for the buses. There are other problems with hydrogen, however. Although it's often touted as a "zero emissions" fuel, the reality, at least at the moment, is a little different. While 40% of the hydrogen produced in the Cute trial will be from renewable sources, the rest will come from the burning of fossil fuel.

This means producing hydrogen from oil or, in the case of the hydrogen for London, from natural gas. So it's not quite the clean fuel that many imagine. Another problem is that hydrogen isn't cheap. In fact, it's far more expensive than diesel. Early results from the Madrid trials suggest that hydrogen buses cost around ó4 (£2.80) a mile to run; that compares with a single-decker bus in London running on diesel for about 23p a mile.

Weston is hopeful, however: "As it becomes more of an everyday fuel, the sheer volume will drive the price down and if you factored in the environmental impact of fossil fuel, hydrogen begins to look a lot more attractive." After decades of hype, it looks like hydrogen has finally arrived as an alternative fuel source. The Cute project has spawned a string of hydrogen filling stations across Europe. Since June, Tokyo has had a hydrogen gas station that serves the engineers carrying out trials on a fleet of hydrogen-powered Toyota Highlanders and Mercedes A-class cars - both of which could be on the market within two years. And Londoners will soon have a chance to try out hydrogen-powered public transport.

Although if every British hydrogen filling station creates as much fuss as the first has, it could be a few years yet before our leafy suburbs are clogged up with hydrogen vehicles.